Can a process be established to correct problems such as not charging
programs the full cost of capital, labor, and other resources that they
use?

This paper asks whether labor and support service costs can be charged
uniformly and appropriately to programs so that:

resources used by each program can be compared with the results achieved;
and

there is no bias in favor of using one input over another because it is
subsidized.

This paper is a companion to the one on Capital Acquisition Funds, which
explains that the use of capital is not uniformly and appropriately charged
to programs and suggests a way to accomplish that goal.

Discussion

Federal programs are not uniformly and appropriately charged for all
of the resources they use so that their full cost can be compared with
the results achieved. In most cases, this is because some of the cost is
paid at the Bureau or Departmental level, or by a central agency such as
the Department of the Treasury. These costs, although they are included
in the budget, are paid from accounts that are not associated with the
program. The kinds and amounts of resources that are provided centrally
vary idiosyncratically from one program to another.

In some Departments and agencies, salaries and expenses are charged to
the programs' budget accounts. In others, they are charged to a central
account under the control of the Secretary. In still others, some salaries
and expenses are centrally funded and others are charged to the programs'
budget accounts.

Although the cost of pensions for the military and for civilian workers
hired after 1984 are fully accrued and paid by agencies to the military
and civilian retirement funds, agencies are charged only a fraction of
the accruing cost of pensions for workers hired before 1984 who are part
of the Civil Service Retirement System (CSRS). Agencies are not charged
any of the accruing cost of civilian retiree health benefits; military
retiree health benefits are charged to the Department of Defense on a cash
basis rather than an accrual basis. As a consequence, agencies are now
charged about $17 billion less for workers' benefits than the cost accruing
to the Government

In addition to their program activities -- which provide goods, services,
grants, transfers, or credit to the public in order to carry out the agency's
mission -- agencies engage in support activities, which provide goods and
services to the agency's own programs and sometimes to programs in other
agencies. Support activities are wide-ranging,(1)
and in many cases are financed by their own direct appropriations and provided
without charge to the programs in their own agency and even in other agencies.
Others are provided for a price by agency franchise, working capital, or
other revolving funds, but even when a price is charged, it may not cover
the full cost of the goods and services provided to programs -- in part
because the support activities themselves are not charged for the full
cost of the resources they use or get some financing from direct appropriations,
and in part because their prices may include cross-subsidies and other
pricing strategies to expand their volume of business.

Because these labor and support costs -- as well as capital costs -- are
not uniformly and appropriately charged to programs, it is hard to monitor
program efficiency and effectiveness or to allocate resources to the programs
that are producing the best results. Because the central "subsidies" are
idiosyncratic, some programs have an incentive to use more labor than is
efficient, others have an incentive to use excessive amounts of capital,
and some may have incentives to use excessive amounts of both. Because
program managers are operating in an environment which encourages them
to "cadge" free or subsidized resources -- and which sometimes does not
leave them free to acquire support competitively -- they cannot focus on
getting the best results for the total amount of resources they use. When
they are given the ability to make such choices, the effect is marked.
For example, as agencies have increasingly charged for support services
in recent years and brought those charges closer to full cost, programs
have found ways to economize on such services and/or to acquire them at
a better price.

This issue paper and the one on Capital Acquisition Funds, taken together,
sketch out the Budgeting for Results Initiative, proposed on page
44 of the FY 1999 Budget. The Initiative would allocate funding to
program budget accounts to cover charges for the full amount of resources
used. Program managers would then be accountable for using these resources
efficiently to achieve results.

For labor and support services costs, the following changes would be
made. Salaries and expenses would be charged to the budget accounts of
operating programs, or in the case of grant and transfer programs, identified
in separate program-and-activity lines of a departmental salaries and expenses
budget account. Legislation would be developed to charge agencies/programs
for the full accruing cost of CSRS and small retiree pension systems, and
for the accruing cost of retiree health benefits (which is not now accrued
in the budget, although the accrued cost is required in financial statements).
Veterans disability benefits might also be accrued in parallel with workers'
compensation. Support services would be required to be financed via revolving
funds, as many now are. An objective would be to make such funds increasingly
self-supporting and competitive -- with each other and with the private
sector. Appropriations to the agency head or Chief Financial Officer would
finance support for Departmental oversight and perhaps core systems.

Pros:

Budgeting would be more transparent, with uniform cost comparisons among
programs, and would facilitate allocation of resources to the programs
that are most efficient and/or most successful in achieving results.

Program managers would have control over total program resources and would
have both the freedom and the responsibility to manage them efficiently
and effectively.

The free or subsidized resources that idiosyncratically bias choices toward
excessive use of labor, capital, or support services would no longer create
such biases.

Program managers would have consumer bargaining power for the quantity,
quality, timeliness, and cost of services required.

This is the most efficient way for the Government to acquire services.

Cons:

Budget allocations will change, and programs will appear more expensive
than they are now as central subsidies are removed.

More extensive use of revolving funds for support services will require
additional financial systems support and financial management expertise.

Support operations would have to be planned with service demand fluctuation
in mind, e.g., with a portion of employees without permanent tenure, some
rented space and equipment, and contracting out for some services.

Options:

Definition of Self-sufficiency

Self-sufficiency for support services is a general goal of the Initiative,
but the criteria for achieving it can be more or less stringent.

Appropriations for Departmental oversight could cover a larger or smaller
array of functions for which the Secretary would be permitted to select
the most appropriate support providers. Alternatively, appropriations could
be given to the Chief Financial Officer (who now supervises many or most
support services) or other officials to finance some core services.

Support funds could be permitted to build reserves to finance a deficit
or to borrow from Treasury for that purpose.

Support funds could be permitted to request appropriations to capitalize
new ventures or to borrow from Treasury for that purpose.

Support funds could be required to charge at least full variable cost and
to break even on each line of business or permitted to cross-subsidize
so long as they are self-sufficient in the aggregate.

Budgeting for Results: In preparing the budget, the Administration
had, for the first time, agency strategic plans, annual performance
plans, and performance measures to help decide how to allocate
resources. In general, however, the budget structure and charging
practices do not make it easy to match costs with a specific program.
First, the budget does not charge all of a program's resources to that
program; instead, the budget subsidizes programs by paying for certain
activities centrally. Second, not all budget accounts are as well-
aligned as they might be with the programs they finance. As a result,
in
some cases, the quality of budgeting, management, and resource
acquisition all suffer.
Good budgeting is predicated on the ability to compare
costs and
benefits, at least roughly, across all programs every year. In some
cases, current practices distort such comparisons. Good management
requires that managers focus on, and are held accountable for, getting
the best results for the resources they have. Managers should be free
to
allocate resources as they see fit, and to obtain competitive,
performance-oriented procurement.
To better integrate budgeting with performance planning
and reporting,
as GPRA envisions, OMB will work with agencies to review their budget
account structures and, in consultation with the Budget Officers
Advisory Council and the CFO Council, develop legislation to enable
agencies to charge programs' accounts uniformly and comprehensively
for
the resources they use. As these proposals take shape, OMB will consult
with the Congressional Budget Office, the General Accounting Office,
and
congressional committees on next steps.